The risk in buying inherited real estate

Buying a house is a big decision because it’s a big investment. You need to be aware of the consequences and clear about the risks.

Today we’re going to talk about a common scenario: inheriting the primary residence of a deceased parent, spouse or relative. People finding themselves in this scenario need to sign notarial documents to transfer the property by inheritance. They can also reduce the inheritance tax they owe if they state in these documents that they don’t have any intention to sell the property in the next five years. They may not have to pay any tax at all. This is something they are always relieved to hear when they visit the notary’s office. And they can still register the notarial document for accepting the inheritance in the Land Registry (a requirement in Spain) without any problem.

Time passes. These inheritors forget the statement they made so they could pay less or no tax when they accepted the inheritance. Then someone offers them a good price on the property. They decide to sell, and the buyer acquires the property, theoretically free of encumbrances. But this is not the case. Because of the inheritance, the property was subject to a charge recorded at the Land Registry. But everyone overlooked it. However, the Spanish tax authority, which can review tax declarations made when properties are transferred, won’t overlook it. If the tax authority decides that the wrong amount of tax was paid at the time of transfer, it can impose a new payment of the tax, with the property as security to cover any tax liabilities, regardless of who owns the property today. In the case that we spoke about above, the buyer could get a nasty surprise if the tax authority discovers that the conditions for the tax reduction or exemption taken advantage of when the property was transferred by inheritance were not subsequently met. Thus, tax becomes due on this property, and the new owner must pay it, even though they benefited in no way from the original tax break. This is why we always recommend seeking legal advice before signing any conveyancing agreement or preliminary agreement. You need a lawyer to check for any hidden problems that may come back to bite you. The case we talked about today is just one of the many traps that buyers can find they have fallen into when they sign agreements without seeking advice. There are many other scenarios that also entail great risk.

Carlos Prieto Cid – Lawyer

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Tourist rentals and homeowner associations

We’ve written before about the administrative requirements for renting properties to holidaymakers: https://blog.tarracoiuris.com/en/?p=380
Today we look at the legal issues that can arise with homeowner associations
.

As we stated in our previous post, the government has established social, economic and tax controls in the tourist rental market. It did this because holiday letting can affect housing prices, the make-up of districts and the good relations between neighbours. Politically, these are highly sensitive issues. Recently, there have even been very divisive campaigns by neighbourhood and social groups against tourism, a phenomenon referred to as “tourism-phobia” by some in the media. These groups say that the boom in holiday letting has caused social problems, especially in the historic centres of cities and in communities in tourist areas.

Thus, the government now requires various things if you want to rent a property to tourists. First, the property must have a special registration number. This number, issued by the Tourism Register of Catalonia (Registre de Turisme de Catalunya, RTC), starts with the prefix HUT, which basically stands for “property for tourist use” in Catalan. Second, you must register the property with the regional police so you can register the details of the people who stay overnight in your property. Lastly, you need to pay the Catalan tourist tax (the IEET tax) on an ongoing basis.

As well as having to comply with these administrative requirements, you also need to take into account whether the property you want to let out is affected by a homeowner association. If you have an apartment in a building with common areas or a house or duplex on an estate with common services (pool, sport facilities, etc.), you and your property may be affected by the decisions of a homeowner association on what your property may be used for. Homeowner associations are increasingly voting to prohibit certain uses of properties. This often includes prohibiting owners from renting their properties to holidaymakers.

What can you do to protect your property rights in such cases? You need to seek professional advice to analyse exactly what options you have. We would be more than happy to provide you with this advice. Please contact us if you find yourself in this situation or have any questions.

Carlos Prieto Cid – Lawyer

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Professional services for pensioners residing abroad

When you stop working, it’s time to enjoy your pension. But what happens to your pension if you decide to retire abroad? To receive a pension in Spain as a foreign resident, you need to take into account a range of matters that can turn out to be quite complex.

Spanish pension laws are extremely complex, although this legislation is not applicable to Spanish residents receiving a foreign pension. In this case, you are covered by bilateral social security agreements. In Spain, the Social Security (“Seguridad Social”) takes care of social welfare matters.

One typical situation is migrating when you’re already receiving a pension in your home country. In this case, you need to know what to do to make sure you keep receiving your pension abroad. To start with, you need to submit a number of documents to the social welfare authority in your home country.

You may also need to demonstrate that you are still alive and entitled to receive the pension. Any hitch regarding this matter can result in a stoppage of the payments and can cause serious problems for you as an overseas pensioner.

Another complex situation entails when you have worked most of your life in your home country but now work abroad and plan to stay and live in this foreign country during your retirement. In this case, you need to calculate the most beneficial option according to the applicable international agreements for the periods worked in the two countries.

This situation can vary greatly and can give rise to very complex scenarios because of differences between the legislations of the different countries regarding the minimum retirement age, the minimum amount of years worked required, requirements regarding non-contributory pensions, etc. Ideally, you need to get professional advice when making decisions about such important matters regarding your working life.

Carlos Prieto Cid – Lawyer

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The red tape involved in letting a holiday home in Catalonia

Renting out a coastal property to holidaymakers in summer has become quite complicated, although most foreigners are unaware of the many obligations involved.

In recent years, the Catalan regulations on letting tourist accommodation has become particularly strict. The main political reason for this toughening up of the legislation is a cracking down on tax evasion as many letters of holiday accommodation do not declare their rental earnings in Spain (which is required by law, regardless of whether the owner of the property is a resident in Spain for tax purposes).

However, there is an even more compelling reason for the Catalan government to want to control access to the holiday accommodation market. On the coast and in the old parts of the larger cities, particularly Barcelona, tourist flats have become a social problem, owing to the not always civil behaviour of the holidaymakers (who change from week to week), and also an economic problem, owing to the unfair competition such accommodation represents to the hotel sector.

Before you can let your property to tourists, you must register it in the local council’s register of tourist accommodation. Not doing so makes you liable for some very stiff fines (even for just advertising the accommodation online without anyone actually coming to stay). To be listed in the register, you need to certify that the dwelling complies with certain conditions of habitability and energy efficiency. You also need to register the property with the tax authorities so the corresponding tourist tax (paid per night by each tourist) and income tax can be collected.

Registering a property as tourist accommodation can result in unexpected complications (which may even make it impossible to let the property). If you have a flat or house you want to let to tourists, we offer services to assist you in registering the property with the local council, drafting the letting agreements and ensuring compliance with all the official and tax obligations for total peace of mind.

Carlos Prieto Cid – Lawyer

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Under the new Entrepreneurs’ Law, a residence permit can be obtained by purchasing a property in Spain

In enabling this, the Spanish government is attempting to reinvigorate the property market by attracting foreigners from outside the European Union with the granting of a residence permit for investing in Spain, which brings the added benefit of being able to move virtually freely around various member states under the Schengen Agreement.  

Here, too, there is a danger that an investor will view the purchase of a property as an opportunity to do business in Europe.  This can mean that they fail to check sufficiently thoroughly as to whether the purchase of the property is safe and reputable, as they want to take advantage of the opportunity to gain legal residency in Spain.  The risk is the same as for the tourist who wants to enjoy their holiday rather than attending meetings with lawyers.  In this case, too, the investment is a means, not an end, for just as the tourist sees the acquisition of a property as a means that secures them their holiday in Spain, the entrepreneur sees their opportunity to obtain a residence permit by purchasing a property, which then enables them to move freely around the Schengen area.  Both view getting adequate protection for their purchase as unnecessary.  If any problems subsequently arise, they find themselves compelled to find a lawyer to solve the problems arising from their failure to seek independent, professional advice.  However, by then it is often too late, and if there is a solution, it will involve much higher costs than if they had sought advice at the right time.  Well-advised investors can avoid making such mistakes.

Carlos Prieto Cid – Lawyer

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Purchasing property in Spain as an investor, not as a tourist

Each year, many of the millions of tourists who spend their holiday in Spain decide to buy a property in their destination country.  However, when investing their savings in Spain, they often act whilst still in a holiday mood, and make major decisions without due care and attention.

In almost any language, the term ‘tourist’ leaves a slight aftertaste in the mouth.  Airlines offer their cheapest tickets under the heading ‘tourist class’, while in every country that survives on tourism – and Spain is no exception – tourists are seen as easy prey who are only in town for a short period of time and can easily be taken for a ride.  This image of the typical tourist, whom it is easy to hoodwink and escape unpunished, is largely down to their poor language skills and lack of knowledge of the local customs, but also because tourists are on holiday, of course, and want to enjoy their short time away from home and are therefore relaxed and less vigilant.  As a result, they do not act with the same amount of care as they might in a similar situation at home.

Purchasing a property always involves a large outlay.  In many cases, sums are invested which represent many years of saving.  Such a decision should be given the appropriate degree of protection and made with as much information as possible on the potential legal and financial risks.  Sadly, as lawyers, every day we see how foreigners are conned when purchasing a property and lose their money as a result of failing to seek advice.  Often, people think they don’t need any advice, but then comes a rude awakening.  The cost of an independent consultation is minimal compared to the often hidden dangers when signing a contract of sale for a property; and such advice can only be independent if it has no connection with any other professionals involved in the sales contract.

Carlos Prieto Cid – Lawyer

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New campaign of the Tax Agency to demand the payment of income tax to non-residents

Even if they are fiscally non-resident, owners of real estate in Spain must file a separate income tax return each year and pay the so-called income tax for non-residents (IRNR) for revenues earned from the property .

The Spanish state tax authorities have not been very demanding until now regarding the payment of income tax to fiscally non-resident property owners. Many homeowners are not aware of the existence of this tax liability and can not understand why they have to file a tax return and pay this tax in Spain, despite the fact that they are not getting any income. They come to Spain just to spend their holidays: they do not work, they do not receive interest income from cash deposits in the bank, they do not rent their property. However, the mere possession of a property in Spain, as in other European countries, is considered by the law as income, even if the property is not rented. State tax rules require that the owner gets benefit of his own real estate anyway, even though these objects are not leased. The only exceptions are the cases in which the property is one’s own domicile or if the property is devoted to economic activity. Both cases can never happen with non-residents.

There is another tax, the municipal tax on property ownership, the so-called IBI (Spanish Impuesto Sobre Bienes Inmuebles), the payment of which the local municipality requires to property owners each year, and which is calculated and declared by the administration itself. In contrast, in the case of the state income tax for non-residents – IRNR-, the tax inspection is not mandated to prepare tax returns for the non-residents, but it is the taxpayer himself who is required to provide an annual tax return, and calculate and pay the property taxes on its own initiative.

This month, many homeowners who spend their holidays in their own apartments or private homes in Spain, received a letter from the Spanish tax authorities, reminding of the existence of the tax on the income of non-residents and the obligationy of paying it. Earlier, the state tax agency was very generous regarding this tax. Now, however, given that the economic situation is so bad, it appears that IRS has become stricter, requiring submission of tax returns and payment of this tax by all non-residents who own property in Spain.

Carlos Prieto Cid – Lawyer

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If I change my residence to Spain, what should I do with my car?

If you are used to walk around the urbanizations in the Spanish coast, you realize that there are plenty of cars with foreign number plates parked for months or even years at the entrance of the house of their owners. All these vehicles are in an irregular situation, which may cause a complaint and have as a result a significant administrative fine for smuggling.

The change of residence has very important consequences in daily life. One of them is the legal situation in which our car will be: a car registered in a foreign country can only circulate legally in Spain during several months. Beyond that deadline, we are required to register it in Spain, following the procedures provided for each case.

Due to the current economic situation the Spanish administration exhausts all possible ways to raise revenue. Nowadays we are detecting an unusual activity of the police inspection, chasing offenses with which the state previously was more tolerant. That’s why resident foreigners, who have maintained in Spain for years without any problems their old cars registered in their home country without worrying about legalizing them, are now very often facing heavy fines and administrative complaints because of this offense.

The vehicle legalization due to a change of residence is a very complicated process, in which different administrations are involved without any coordination between them. If our home country is not a member of the European Economic Community, as in the case of Switzerland or Russia, we must formalize import customs formalities before the car can be tested by the official stations of roadworthiness. In addition, if the vehicle was not marketed in the European Economic Community, we will not have the necessary certificate of conformity, and we will have to instruct an authorized inspector to report on its technical specifications. This requires high costs which, added to the administration fees and the necessary management costs, can make the legalization economically unviable, depending on the situation and the age of the vehicle. However, we can not forget that to unsubscribe a vehicle or to test its roadworthiness can only be made in the country of registration. That means that we should return to the country of origin with the vehicle, if we decide not to legalize it into Spain. In any case, if we are denounced, the fines or the risk to be prosecuted for smuggling can have a much higher cost.

Carlos Prieto Cid, Lawyer

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New legal requirements for holiday homes

Our costs welcome millions of visitors during each season. Not all of them are owners of an apartment or a property or stay in a hotel. The majority of them decide to rent a holiday home during the stay. A new legislation fights against the black market on this sector and wants to guarantee the maintenance of our touristic brand.

The new legislation addresses to the touristic sector not (like in the past and without any great success) to the housing sector itself. This law considers a “vivienda de uso vacacional” those properties that are conceded by the owner, directly or indirectly, to other persons in exchange of a consideration. Because of this, every accommodation must have a “cédula de habitabilidad” and ensure that there is enough furniture and equipment according to the number of offered places for visitors. The “cédula de habitabilidad“ is a proof of flat’s habitability which is prepared by the architect and has to be proposed at local housing authority.

How to convert a house or an apartment into a „vivienda de uso vacacional“? The law simplifies this procedure by using the so-called „régimen de comunicación previa“. Hereby it is only necessary to display the intention to rent the flat at the local administration and without any delay it could be started with renting. In this display the owner declares the responsibility to ensure the necessary amount of above-named equipment. He also needs, besides the identity card, the „cédula de habitabilidad“, a confirmation of energy supply and an insurance contract with an adequate coverage.

In this point the municipality is getting involved. This means that it is possible that the community charges a certain fee which could be established in the financial regulation. It would be desirable that administration wouldn’t take advantage of this to generate new revenue. The law intends to secure the quality of the offered holiday homes and it doesn’t want to increase costs which could have the opposite effect namely a promotion of shadow economy. The success of this law depends on an easy handling without further costs as well as on a resolute control.

A holiday homes status as a “vivienda de uso vacacional” means that it could not be turned into a main or secondary residence. The owner has to register guests’ personal data and, in accordance to local security service, send them to the central administration of the police. The stay in a holiday home with this status could not last longer than three months.

Another question that should be answered is that it is not allowed to split the holiday homes. Some owners of larger estates usually rent single rooms to different persons. Or in some cases there are different segregated fully furnished apartments. In these case the law states that rent is only possible if there is an own „cédula de habitabilidad“ for each lodging. If there is none, the „régimen de apartamentos turisticos“ is applicable. For this it is necessary to show a reception with at least 10 square meters. Furthermore the minimum standards for hotels like weakly cleaning are to be maintained.

Carlos Prieto Cid, Lawyer

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Income Tax for foreign property owners

Foreign nationals who are not registered for tax in Spain but own property in the country must submit a tax declaration for their income tax to the state tax office every year. This involves the so-called Impuesto de la Renta de No Residentes (Income Tax for Non-residents).

Many property owners do not understand why they must declare and pay tax in Spain even though they earn no income here because they only come here for holidays and therefore neither work nor are involved in any economic activities or receive interest from banks on financial investments. There is usually no rental income from property either. Despite this, in Spain (much like in other European countries), simply owning a property is regarded as income, even when the property is not let or leased out. The state tax system assumes that a profit is made from the property even if it is not rented out, it is not the own home or if the property is not dedicated to economic activity, which for non-residents can never be the case.

How is this fictitious return calculated? Spanish law stipulates that income earned from the simple possession of a property equates to a certain percentage of its cadastral value. This percentage is either 2% or 1.1%, depending on the year in which the Spanish Land Registry (or rather, the respective municipality), updated its property values. The Land Registry (Catastro) is a national register of properties, answerable to the Spanish tax office, which gives the authorities information about these properties (owners, size, use, year of construction, boundaries, etc.). The information stored at the Land Registry can be submitted by Land Registry officials themselves, the municipalities or the owners of the property. One of the most important pieces of information on every property is in fact the cadastral value. This value is dependent on many other objective details and here on the coast can generally be a lot lower than the market price that we would set for the property.

Despite this, this objective value is decisive for almost all authorities and provides the basis for many taxes, including income tax for non-residents. This percentage of the cadastral value is therefore the basis for income tax for non-residents, which is currently 24%. Every year, the owners must pay the resulting sum by 31 December the following year. This means that foreigners who own a property in 2011 must submit their tax declaration to the tax office and pay the tax by 31 December, 2012. In 2008, the tax office changed the forms for this declaration, which caused problems for many foreigners who did not hear about this amendment in time. Until then, Form 214 was used, but now Form 210 must be completed. The change was a consequence of recent tax reforms, which saw the abolition of property tax. However, the tax for non-residents was retained because it is regarded as a form of income tax rather than a property tax.

Otherwise, for non-residents there are only the local rates, the so-called IBI, which are paid as a municipal tax that every municipality demands from property owners each year and which is calculated and demanded by the local authority itself.

Carlos Prieto Cid, Lawyer

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